Has Suzuki short-changed Maruti? In a word, “Yes.” The announcement of the Gujarat plant has left Maruti’s shareholders with the short-end of the stick. Maruti is funding the entire capital expenditure and reimbursing the cost of manufacturing without having any shareholding in the company. Here’s how:

* Suzuki Japan will bring in about Rs 3,000 crore to set up the first phase of production at Gujarat, which is being funded almost entirely by Maruti. In 2012-13, Maruti paid Rs 2,450 crore as royalty and an additional Rs 136 crore as dividend to Suzuki. Almost Rs 1,200 crore of royalty is accrued to Suzuki for the first half of 2013-14 sales.

* Suzuki Gujarat will invest in the first phase of capex. The remaining phases will be undertaken from the margin Suzuki Gujarat makes on selling cars to Maruti. Effectively, Maruti also funds the remaining capacities at Gujarat, and yet has no ownership of it.

* Suzuki Gujarat will pay Maruti lease rentals for the use of Gujarat land. Maruti will reimburse Suzuki for this lease rental through the cost of car manufacture. In effect, Suzuki will have free use of Maruti land in Gujarat.

Contrary to claims made in the announcement, it is financially more efficient for Maruti to invest in the Gujarat plant than Suzuki Gujarat. Maruti contends that Suzuki Japan is making the investment in the Gujarat plant because it has a lower cost of capital than Maruti. This means Maruti gets better returns investing its Rs 7,500 crore cash surplus in India than Suzuki Japan gets by investing its excess liquidity in Japan. But if Maruti invested its Rs 7,500 crore in the business instead of investing it in securities, it would get a much higher return, because Maruti’s RoI from core operations is much higher than its investment yield. Thus, Maruti shareholders lose out on the incremental returns that investing in core operations would generate.

The Gujarat plant announcement is just another action that Suzuki Japan has taken that is far more in its own interest than in Maruti’s. Suzuki Japan has steadfastly doubled its royalty payout percentages over a five-year period to its current 5.8% of net sales. The rate of increase in royalty (in rupee terms) is significantly higher than the growth rate of Maruti’s sales, PAT or dividend. If royalty had not been paid in 2012-13, Maruti would have reported double the profits and shareholders would have received